The Trouble With Data Mining: January Edition

“As goes January, so goes the rest of the year.”
– Ancient Wall Street Wisdom

Is it important that January be up and that the first week in January be up?  Yes.

But it is equally important that all the other months of the year be up as well.

Down-months are rare for the S&P 500, almost as rare as down years – which are only about 1 in 4 to begin with.  Let’s take the current secular bear market, now into it’s glorious twelfth year (it’s like the musical Cats!  Now and forever at the Wintergarden Theater!)

So we’ve been in a secular bear market for stocks since March of 2000.  During this dreary ten year stretch stocks have essentially gone nowhere in nominal terms and, adjusting for inflation, are actually down big in real dollar terms.  Says my pal Eddy at Crossing Wall Street:

From the end of 1999 to the end of 2011, the S&P 500 dropped 13.58%. Dividends added 23.59%. But over those 12 years inflation was 34.69%. That adds up to a real total return of -20.70%.

But as bad the post-millennium stock market has been, only 4 of these last bear market years have recorded an annual loss for the index (2000, 2001, 2002 and 2008).  This has only taken the 1-down-year-in-4 average down to 1 in 3.

So if we understand that the market records an annual gain somewhere in the vicinity of 75% of the time, the January barometer becomes less useful.  But it doesn’t become totally useless until we look at the rest of the months of the year and their supposed “correlation” with full-year performance.

For that, I’m just going to steal from Joe who himself cribbed from BTIG’s Dan Greenhaus.  Dan and Joe like me so it’s fine…

It is commonly asserted, as we note, that January is an important leading indicator for full year performance. In 2008 for instance, January was down by 6.12% and the full year ended up being down 38.5% inclusive of said January. But, a quick look at other months shows the exact same trend. Taken at face value, the belief that January is an important indicator of the twelve month period imparts greater importance on January than any other month and other twelve month periods. However, when doing the same analysis on other months, we learn that:

• When February is down, the 12 month return inclusive of that February is 2.0%. When February is up, the S&P 500 returns 12.53%
• When March is down, the 12 month return inclusive of that March is 3.5%. When March is up, the S&P 500 returns 11.46%
• When April is down, the 12 month return inclusive of that April is -0.23%. When April is up, the S&P 500 returns 12.87%
• When May is down, the 12 month return inclusive of that May is 4.39%. When May is up, the S&P 500 returns 11.61%

We could go on but you get the point. As goes any month so goes any twelve month period.

In other words, January is special only insofar as it sets a psychological tone because it comes at the beginning of the year.  But the correlation is no more meaningful between up Januaries and up years as it is between up Aprils and up years.

So cheer on the indices this month, but don’t make any big plans based on how it goes.

Sources:

A Look at the Long View (Crossing Wall Street)

The Truth About the ‘January Effect’  (Business Insider)

What Does January Mean to You?  (All Star Charts)